PDD#18: Payment Orchestration

Preface

In the 2010s, the digital payments were largely dominated by a handful of methods, such as credit cards, PayPal, and the traditional forms for offline bank transfers. Fast forward to today, your options include pay via card stored in the account, a (new) debit or credit card, PayPal or other wallets, BNPL options and even cryptocurrencies. And these options are only going to increase as customers demand for faster payments and account to account (A2A) options.

How do you solve for the checkout experience in an age where Fintech players start providing 100+ payment flows, and their customers (across risk profiles) then demand all these options for push payments, pay later, digital coins, direct payment from account etc. ?

Payment orchestration platforms offer a unified solution to these challenges by acting as a central hub that manages various payment methods and gateways. In this article, lets deep dive into what is a payment orchestrator, and how it is already enhancing your checkout experience.

Disclaimer: The information provided in this article is for general informational purposes only and should not be considered as professional advice. The content is based on my knowledge and research, and I have endeavored to ensure its accuracy. However, please note that information can change over time, and I cannot guarantee the accuracy, completeness, or relevance of the content at all times. The views expressed in this article are solely my own and do not necessarily reflect the views of any organizations I am affiliated with.

Payment Orchestration is a relatively recent term in the fintech industry, often coming into place that was formerly occupied by a Payment Gateway (covered in Edition #6). This concept involves managing a section or entire end-to-end lifecycle of a payment, and leveraging various kinds of external configurable services along the way to best optimize that lifecycle. And it does so at an individual transaction level, meaning, the orchestrated flow of each new transaction could be different from the previous one.

Payment orchestration platforms can simplify the complexity of managing multiple payment methods, gateways, and market regulations for merchants.

Before I explain it further, lets look at the pain point that industry has solved via payment orchestrators.

Forces that led to need of Payment Orchestration

Around the early 2000s (think dot com), the rapid growth of e-commerce created a need for reliable and scalable online payment systems. PayPal was born in 1998 to solve this need by providing a secure and convenient way to make payments online, quickly becoming a popular choice for e-commerce transactions. As e-commerce matured, demand for more diverse payment options increased too. Companies tried to find ways to not openly share credit and debit cards details. Digital wallets (like Apple Pay and Google Wallet), Buy Now Pay Later (BNPL) services, cryptocurrencies (thanks to Blockchain concept), and region-specific methods (like iDEAL in the Netherlands and Alipay in China) picked pace.

All this meant mostly connecting to multiple payment systems to gather funds from customers. Managing these multiple payment gateways became technically challenging and resource-intensive. Some people even started calling out how every company would become a fintech company to survive.

Companies like Stripe have picked up majority of this load in US, and Adyen in European region. Both have their own strength in its own market, and many global players might connect with both. Issuers have been busy handling the new ways of Fraud by developing better solutions in handling and managing digital signals. Tools like American Express SafeKey were developed to make sure it was really the authorized person using the Card. And slowly the digital experience has became more fragile, repeat password/OTP entries becoming norm. (The breaking point here being the number of varied systems working together to process that transaction of yours.)

Look at the payment options that Stripe has integrated to, showing the large spread of demand for payment options across globe:

In response to these challenges, tech focused companies developed payment orchestration platforms.

Payment Orchestration

Now, enter Payment Orchestration — a modern, unified and programmable orchestrator that goes beyond the role of a gateway by actively directing and managing transactions in real-time. It does so by connecting to numerous payment processors simultaneously, simplifying the back-end and front-end processes while also giving consumers a variety of payment options. And as a programmable layer, Payment Orchestration dynamically guides payments through the most advantageous channels. It assesses the optimal route for each transaction based on a bunch of factors like cost-effectiveness, transaction success rates, and the overall customer experience.

Image Source: Trimplement

Visualizing Payment Orchestration Flows

The starting tenet in this newsletter is that all payment methods have same anatomy, as laid out in first article of this newsletter: Anatomy of a Payment Transaction. Let us understand the orchestration via that structure.

Let's say you are a merchant selling custom phone covers, and are ready to ship the merchandise to any place in the globe. We will take three customers from three different countries, and configure different experience for them based on local preferences we select in the orchestration layer:

1. Customer A from Norway: Use Adyen as Gateway, & show Klarna Buy Now Pay Later as default
2. Customer B from England: Use Stripe as Gateway, show A2A as default
3. Customer C from US and elsewhere: Use Mastercard as as Gateway, show Apple Pay as default IF device has iOS (Apple device)

Here is how such a payment flow would get executed:

Initiation of Payment:

Payment Orchestrator will first ensure that the transaction is legit and not a fraudulent one. In case it looks suspicious, payment orchestrator or gateway might initiate MFA (Multi Factor Authentication). Once that is cleared, it would check buyer's location and determine the appropriate payment method and gateway based on rules to be set by the merchant or orchestrator).

• For Customer A, Orchestrator determines Norway as the country of origin and initiates checkout page layout via Adyen's API. It also passes the preference for Klarna as default. Adyen could determine proper sales tax at this stage including applicable VAT (based on how Adyen is configured).

• Customer B gets routed to Stripe's APIs as orchestrator determines best route to try here is A2A (Account-to-Account). When payment would be submitted, Stripe will connect to customer's bank to complete the transaction.
• Customer C gets shown typical Credit/Debit card entry form and Apple Pay button. The transaction is processed by Mastercard MPGS gateway.

Authentication, Processing:

• Authentication: The orchestrator facilitates a secure connection Adyen, Stripe or Mastercard Payment Gateway (MPGS), which then further establishes secure connection with the Financial Institution (FI) with whom the customer has relationship. Issuer/ Financial Institution level authentication would happen here. This could also include SMS based authentication or biometric authentication.
• Transaction Processing: Once authenticated, the Financial institution would processes the payment and confirm the transaction back to gateway, who then passes it on to the orchestrator.
• Confirmation: The orchestrator receives confirmation and updates the e-commerce platform, notifying Customer of the successful payment, or reason in case payment could not be done.

Clearing and Settlement:

Once the transaction is confirmed, the orchestrator handles the clearing and settlement processes, ensuring that funds are transferred from the customer's account to the merchant's account efficiently and securely.

What else: The cherry on the top

Above example was a simple routing use case based on the cost (pricing), and regional capabilities. But orchestrator can be much more. It can switch between the two Payment gateways based on latency and success rate of the options available.

Payment orchestration platforms often come with built-in security features such as tokenization, encryption, and fraud detection. They also help businesses stay compliant with various regulatory requirements like PCI-DSS, reducing the risk of data breaches and fraud.

And once established, a payment orchestration platform can easily add new payment methods and gateways without significant additional development effort. This scalability is crucial for businesses looking to operate globally.

Reporting is another key benefit of having all your payment needs unified in one platform. Payment orchestration platforms provide detailed analytics and reporting tools, giving businesses insights into their payment processes. This data can be used to identify trends, optimize payment strategies, and improve overall financial performance. (think about it - just one single dashboard, with in built controls and alerts!)

Expanding Payment Orchestration to in-person transactions

While payment orchestrators are often associated with online transactions, they also offer significant benefits for in-person transactions. In a physical retail environment, payment orchestrators streamline the payment process, enhance security, and improve the overall customer experience. The encryption, tokenization, and fraud detection data from across channels can be used for improving in-person transactions too.

An orchestration layer can automatically select the best acquirer based on their conversion rate for a particular card, transaction type, merchant category code, shopper location, transaction value and so on. It can also locate an alternative acquirer in real time if the first authorization request is denied.

Above illustration from The Paypers illustrates how merchants use orchestration to simplify and enrich both ecommerce and POS commerce.

Projections suggest the global Payment Orchestration Platform market size will rise at a 24.7% CAGR until 2030, from a value of $US 1.13 billion in 2022. (Source: Grand View Research, 2023)

Concluding Remarks

When options become a too many then either they become a commodity (with little to no meaningful difference between each other in eyes of customers), or people start choosing a service that helps them navigate the mess. Payment Orchestrator is solving the latter. You can not expect a chef to worry more about the ability to receive the payment than the dishes they are working on, payments is not the business they are in!

And for that reason, this space will only grow much bigger, and it will, in turn, create few brands into commodities. Acquisitions will happen and partnerships will flourish. Consider this current reality itself: you are reading this Article on the Internet via a connection provided by you Internet Service Provider (ISP). This ISP further connects to a grand network of cables and cloud servers. Before this article was downloaded, many data packets might have been lost but alternate routes were found and your article still got loaded thanks to orchestration layers. Question is, who will the crown of that ISP or operating system of payment interface of the future. Perhaps Stripe? Perhaps hardware platforms like Apple, Microsoft and Google who have closer access to customers? Or maybe it will be a crowded and regional space. Only the time will tell.

That is a wrap up for now. Your comments, opinions, and corrections are all much welcomed!